In Bay Area Cellular Telephone Company v. City of Union City, (— Cal. Rptr.3d —, 2008 WL 1874690, Cal.App. 1 Dist., April 29, 2008), a California Court of Appeal considered whether a fee imposed on telephone lines used to fund a city’s 911 emergency communication system is a special tax. The Court of Appeal held that the fee is a special tax and required voter approval before it could be imposed.
Facts
In 2003, the City of Union City (“City”) adopted Ordinance No. 617-03 and established the Emergency Communication System Response Fee (“Fee”). The fee is determined on a flat rate, per-line basis in an amount established by City Council resolution. The Ordinance imposed the fee on subscribers who maintain access to the 911 system by subscribing to a local provider within the City limits. For example, a wireless user is considered a subscriber if his or her place of primary use is within the City’s geographic boundaries. The funds are collected from the service provider and deposited into a secured trust account, which are not commingled with other City funds. The funds are utilized to cover expenses incurred for maintaining the 911 system. Certain telephone lines are exempt from the Fee, including pay phones, nonprofit hospitals, and educational organizations. Regular access lines are charged $3.22 per month, with trunk lines being charged a higher rate.
Before Ordinance No. 617-03 went into effect the City’s 911 system was funded by the City’s general fund. After the ordinance went into effect, the 911 system was funded by revenue obtained under the ordinance including the City’s general fund. The funds raised under the ordinance “were designed to finance improvements and operation of the City’s ‘enhanced’ 911 communications system,” which automatically provides a caller’s location and number identification. However, it is important to note that access to the 911 system is not limited to those that pay the Fee; any person physically located in the City has access to the system.
Bay Area Cellular Telephone Company and other telephone service providers brought a lawsuit against City asking the trial court for a declaratory judgment stating the Fee was an invalid special tax under Proposition 218, which California voters passed in 1996. The trial court held that the Fee was a special tax and that it was void because it was-enacted without a vote of the electorate.
Decision
The Court of Appeal affirmed the decision of the trial court finding that the Fee was a special tax and void because it was not approved by the voters. Proposition 218 added articles XIII C and XIII D to the California Constitution. A “special tax” is defined as tax imposed for specific purposes, which is placed into a general fund. Under Proposition 218, “[N]o local government may impose, extend, or increase any special tax unless the electorate has approved it by a two-thirds vote.”
However, not all impositions for specific purposes are special taxes that are subject to the voter approval requirement. Generally, “taxes are imposed for revenue purposes, rather than in return for a specific benefit conferred or granted.” For example, “[s]pecial taxes do not encompass fees charged to particular individuals in connection with regulatory activities or services when the fees do not exceed the reasonable cost of providing the service or activity for which the fee is charged, and are not levied for unrelated purposes.” Also, a “user fee,” which is a “payment for a specific commodity purchased” is not a tax. A fee must bear some relationship to the costs and benefits associated with a service. A tax, however, can be levied “without reference to peculiar benefits to particular individuals or property.”
The court concluded the Fee is a special tax. It noted there is no specific group benefited by the imposition of the Fee because the 911 system benefits all of City’s inhabitants. The Fee is not charged for the use of the system, but access to a system that is part of a governmental service. The fact that the Fee does not raise revenue for the City’s general fund did not change the court’s conclusion that the Fee is a special tax. “Although Proposition 218 specifies that a special tax includes a tax imposed for specific purposes even if the proceeds are placed into a general fund . . . it is not limited to such taxes but by its terms encompasses those placed into a separate fund.”
The court rejected City’s argument that the Fee is not a special tax because it is voluntary and residents subject to the Fee consented to pay it when they obtained telephone service. The Fee is not imposed in exchange for a resident’s voluntary decision to request a government service, but from the decision to purchase telephone service from a private provider. The Fee is not only imposed on new customers but on customers who already had telephone service before the ordinance was passed. Unlike groundwater extraction charges that are based on actual or estimated water consumption, the Fee is based on the presence of a telephone line, whether or not the line is ever used to make a 911 call.